康菲 (COP) 2004 Q2 法說會逐字稿

Good Morning and welcome to the ConcoPhillips second Quarter 2004 earnings release conference call , today’s call is being recorded.

At this time for opening remarks and introductions I would like to turn the call over to general manager of Investor Relations Mr. Clayton Reasor.

Please go ahead Sir.

Thank you, good afternoon and welcome to our second quarter earnings conference call.

We are joined by James Mulva, our President and C.E.O and John Carrig the Executive Vice President Finance and C.F.O.

During today’s conference call we will be referring to presentation material which will help us describe second quarter performance and hope they will give you a better understanding of factors which drove our performance this quarter.

These slides are available to you on our internet site, www.concophillips.com and it will be useful for you to have them during Jim’s prepared remarks.

On page two of this presentation , you can read our Safe Harbor language which states that in our response to questions and in our prepared remarks we will be making forward looking statements and actual results may be materially different from the statements we will make today.

Our (inaudible) cause these potential changes to occur can be found in our filings with the FCC.

So if you turn to page three, I’d like to introduce the President and C.E.O of ConcoPhillips, Jim Mulva.

Thanks to everyone joining us today for our second quarter conference call we appreciate your interest in ConcoPhillips.

As Clayton indicated, I am going to start with my comments on page three.

This year, net income of over $2b we had over $2.3b in cash from operations.

We have reduced our debt by about 1.5 billion.

Our income from continued operations was up 26% on a sequential basis and 84% year over year.

As we indicated in our media release this morning, performance was good but our operating performance could have been even better and I want to comment on that as I go through the slides. (inaudible) we produced $1.56m (inaudible) a day during the quarter , so our production is about 3% lower than last quarter primarily due to scheduled maintenance, some down time seasonal decline in asset sales and then I’ll go through more of this in subsequent slides.

Our refining margin business benefited from some of the crash spreads (ph), our realized margins were negatively impacted by lower claimed car deals and other items but again I will cover that when we get to refining marketing.

Our international capacity utilization with 62% due to extensive turn around activity.

Our asset sales were $905m completed to (inaudible) so from the beginning more than 4.7b approaching to (inaudible) since the consummation of the merger.

Result volume activity products reduced our debt to capitalization ratio to 29%, I’m moving from the third slide to the fourth slide.

Total company net income.

Five provides a sequential quarterly comparison of total company earnings, income from continued operations rose 2b in the second quarter from 1.6b last quarter, now here’s the beneficiary of higher commodity prices and margins and more than offset the lower EMP production volumes and value stream (inaudible) yields.

We also experienced higher expiration expenses, all gained on asset sales and increased cost in the downstream associated with planned and unplanned downtime.

The discontinued operations contributed 62 million of net income to offset our total net income with 2.75 billion.

I’m turning to page 5, the comp from continuing operations, you can see the two pie charts, they show proportion earnings generated by each of our business units during the second quarter and during the first half of the year.

You can see that EMP contributed 60% of second quarter earnings and 64% of the company income year to date, in terms of our capital employed in our portfolio, EMP is now at about 63 ½% of the capital employed in the company.

Refining and marketing generated 36% of the second quarter’s and 32% so far this year, and refining marketing represents 32% of the company’s capital employed.

Midstream and chemicals each contributed about 2% of the company’s income and combined, Midstream and Chemicals represents 4 ½% of our capital employed.

I’m moving on to the page six of the presentation, overcoming cash flow.

Cash flow from operating activities was $2.3b in the second quarter we had $905m from asset sales and the asset sales came primarily from our dispositions in retail marketing and the consolidated midstream assets.

Half of creditors encashments amounted to 1.6 billion and the majority of that 1.6 billion went towards (inaudible) asset development.

We paid out just a little bit less of $300 (indiscernible) in dividends, the balance sheet count was reduced by 1.5billion, our off balance sheet debt went down $200m, from 2.9- 2.7 billion.

If you look at what is on the balance sheet and off the balance sheet in the second quarter the reduction was 1.7billion.

I’m going to page 7 now, a total company cash flow and the pie charts show what took place in the first half of 2004 and the left hand side of the pie chart shows that cash available is 5.7 billion and a little bit less of the third which came from asset sales.

As you look on the right, the capital expenditure is worth $3.1billion, and that’s exactly right on schedule for what we expected and in 48% of funds generated were applied to pay down debt in front of dividend.

In fact if you look over the last six quarters all 2003 of the first two quarters of ’04 the availability of cash is about 49% what we used towards debt reduction and dividends .

I’m moving to page 8, Asset sales.

Now since we closed the merger we sold more than $4.7 billion in assets and that’s about $200m more than the objective we outlined last call in our analyst conference of 4.5b.

About half of the assets sold to retailing marketing assets and another half were made up by runner non legacy assets and EMP.

You can see from this slide, we sold about an additional $1.4b of assets this year $905m in the second quarter.

Now you’ll continue to see some very small amounts of asset disposition normal course for our business going forward but we have completed our asset sales program for the company that we have announced when we consummated the merger.

We don’t tend to highlight just the area that we go forward in our future earnings conference call unless there is some unique situation we need to talk about.

I’m moving to page 9, debt ratio improvement.

The strength of earnings and cash flows and our approach to at this point on capital spending will continue to make good progress reducing debt certainly strengthens our balance sheet and provides certain helps on share holder returns.

As a matter of fact at the beginning of 2003 we reduced our balance sheet by $7 billion, that’s some 22.6b to 15.6 billion.

Our off balance sheet debt during the same time period from early 2003 went from 4.2 billion to 2.7, so that’s down 1.5 billion.

We step back and we look at the 18 month time period, both on and off balance sheet debt went from 26.8billion to 18.3 , so that’s a reduction of 8.5b as you look at the percent we’ve reduced our total on and off balance sheet debt by 32% out of 1/3 in our past 18 months.

Bar chart on the left shows 3.7 m growth in equity over the last two quarters, shuts down a 15.6m on the balance sheet resulting in debt ratio is now 29%.

If you go back to a comparable time period at the beginning of ’03 were looking at debt ratio of 43% so being down at 29 has gone down 14 points during this time period

I’m going to page10, our expiration production.

Our second quarter production average 1.56 m (inaudible) a day that’s what was expected but we had some plusses and minuses.

Production was negatively affected by the sale of our Canadian Preservera in the second quarter and that had a production and by 18,000 BOE a day.

Then we got a (inaudible) unplanned in the second quarter of Britannia that’ll work out to about effectively a 7000 BOE a day and then we have down time in Alaska which impacted us of 8000 barrels a day.

Our comparative last quarter, our higher production, BOE production from (inaudible) was offset by normal seasonal clients, the unplanned maintenance in the UK, Britannia and the down time in Alaska.

I’m going to show this in more detail on another slide.

On prices, worldwide averaged realized group price was up 12%, $3.65 a barrel and 30.35 a barrel in the first quarter to $34 a barrel in the second in the quarter.

Gas prices, realized gas prices decreased a little over 1% or 5 cents an MCF it went from 4.48 to 4.43 and US prices were up 43 cents and MCF but they were down 37 cents in MCF internationally.

Our pre tax expiration expenses rose from 143m in the first quarter to 163m in the second quarter.

Out of respect to asset sales and expiration production as I said earlier our disposition program is done.

I’m going now to page 11, in EMP productions.

As I said earlier our yearly production was down 3 % but this was expected and is essentially right spot on to what we have outlined in our 2004 operating plan that we shared with you in November at the analyst’s conference meeting .

Our total US production was 637,000 BOE a day in the second quarter and we got 659,000 BOE a day in our last quarter, the first quarter.

So on a year over year basis US production has fallen 6.7%.

In Alaska, our BOE production fell 22,000 a day from 377,355 BOE a day largely due to the normal season of the clients we get with the warmer weather and then we also had the on schedule down time I referred to at Alpine and Prudhoe Bay.

In Tyonek production dropped by 7000 BOE a day as production was impacted by the on plant shutdown at Britannia and nearly a 5000 BOE a day due to the normal seasonal impact of weather.

Normally production was down by 7000 BOE a day but that was a planned shut down.

It is our interest in (inaudible).

Our value on that production is up 13000 barrels a days from 12000, 2500 as we ramp up our production in the field, despite our net liquids production from Bio (indiscernible) have approached about 50,000 barrels a day by the end of this year.

As I said earlier the sale of Preservera in Canada had impact it was predicted by 18,000 BOE a day the impact was 10,000 barrels a day for the second quarter compared to the first quarter , as I said this will reduce our production level going forward 18,0000 barrels a day on an ongoing basis.

Now compared to the second quarter of 2003 our BOE production for the company fell were 4.8%, from 1.641m BOE a day to 1.563.

Now when you compare what the second quarter of 2003 adjusting for the impact of asset sales, our production in the second quarter of this year is flat with production in the second quarter of last year.

I’m going on to slide 10, EMP net income.

Our net income amounted to 1.354billion in the second quarter and this is up about $97m compared to the first quarter and most of the change is driven by higher oil prices. 61m (technical difficulty) US EMP had an increase to 36m.

The lower sales volumes 64m and lower gains from asset sales 60m we had $52m remember of gains of when we sold Preservera improvements.

Harsh rate offset earning improvement.

In addition turning to a negatively impacted in this quarter by lease hold and lease-hold impairments of 42m and has primarily lease hold impairments related to, to make reach in Nigeria as well as Brazil.

Further, we experienced and increase, a one time increase in our Alaska regulated tax tariffs of $9m and now we have the additional expense of about $6m as we ramp our production with the body run downfield in the Timor Sea.

As I move from page 12 to page 13 towards the refining and marketing.

Refining and marketing earnings were up compared to the prior quarter primarily due to higher US refining margins but we did not capture the entire increase which you see on a 3 2 1 crack spread because most of the increase came from gasoline cracks, for our system we typically produced about somewhere in the neighborhood 50% gasoline versus the applied 66% in the 321 crack spread.

So again the 3 2 1 crack spread is significant increases in gasoline cracks

As I had a said earlier we had unplanned down time at our Alliance and the Trainer refineries in the United States.

We’ve had a negative impact of about $30m was also the primary source of increased maintenance costs which were higher by $15m in last quarter so obviously you can see what happens with the lost profit opportunity when you have down time with respect to high price crack market environment.

Internationally we have quite an entire turn around activity of Humber and Whitegate which resulted in increased turn around costs of $25m after tax compared to last quarter.

If you look at our second quarter refining in the US had earnings of $780m and International Refining did $57m and then up to $837m.

We lost money in marketing in the US and we made money in international but the net is that we lost some money in marketing on a global basis.

So what really drove the earnings was on the refining side of the business.

As we said in our immediate release we did well but we could have done even better both upstream and down stream If we look at our total global refinery results it could have been up by as much as $70 million if all of our refineries were running and we didn’t have loss profit of LPO’s.

In terms of the marketing side of the down stream quarter to quarter which adversely impacted from the neighborhood of about $50 m, of that $50m about $20m relates to inventory reserves revaluations we have a $10m impact on the timing of other expenses and then we traded out our assets with respect to products and we had about a $20m lure trading results in the second quarter compared to the first quarter.

If you step back and you look at total refining and marketing in the second quarter if everything had run near close to perfection and we didn’t have this loss profit opportunity we’ve had in the neighborhood of this all adds up nearly $100m or more now after page 14.

During the second quarter our refining market and income was $818m that’s a 76% improvement over the 354m or 354m more than the last quarter and the increase is primarily due to higher realized tax spreads in the US and for the factors where offsets.

Including factors that I just talked about this.

Turn around costs for 38m primarily due to turn arounds at White Gate, and the longer than planned -- we had a 43 day turn around at our Hungary refinery and this was about 11 days longer than we expected.

Now the inventory impact and the timing of certain expenses and lower trading results, lowered refining and marketing and earnings in the second quarter by about $50m when compared to the first quarter.

I’m moving on to page 15 -- worldwide refining margin improvement.

The pie charts show second quarter year to date in terms of sources of margin improvement and you can see on the left hand side 56% of our sequential improvement in the earnings came from the mid-continent’s and the west coast .

If you look at the chart on the right you see year over year improvement for the first half.

We earned 1.282 billion versus last year the income was 710m so looking at the first half of 2004 right hand side aside, you can see the improvement coming from all the geographic areas where in which we have our facilities.

I’m moving on to page 16, which is the midstream chemicals emerging businesses.

The midstream part of our business made $42m in second quarter is down $13m sequentially and up 17m in year over year and this was due to lower volumes which resulted from the dispositions we had in company operated assets sales in the midstream.

Chemicals, had income of $46m that’s up $7m from the first quarter we had higher sequential earnings from better aromatics margins but that more than offset by lowering all of olefin and poly-olefin margins.

The emerging business were up $29m.

Costs aren’t going up, for what we do in our technology operations research and development, but we did have additional costs as a result as we started up our new Emmingham power plant in the United Kingdom.

I am moving on to page 17 – the Corporate expense.

Corporate cost excluding the income from discontinued operation $218m in the first quarter and that’s up from the prior quarter.

The increase in our costs over the last quarter was we had $15m in higher end interest expense.

We had $15m higher Corfin site remediation cost and a $6m change in foreign currency and tax.

These costs increases were partially offset by -- there is no more merger related costs and we didn’t have merger related cost in the second quarter.

Although our debt balances are coming down the net interest expense increased because we had more interest income and then the timing of Kaplan’s (ph) interest, associated with our large capital growth projects did impact the net interest expense.

Going forward, we expect lower interest cost because we have lower debt balances however in the third quarter we will call some debt and this will have an adverse impact, a one-time impact of $37m.

Now going on to page 18, you can see our second corporate quarter loss, relative to first quarter corporate loss $190m.

This quarter results were a significant improvement over the second quarter last year, however they were short of our target of $180m in corporate charges.

Now let’s go on to some of the reasons why that took place.

Now with respect to the effect on the rest of the year.

We expect our corporate charges to be about $400m with the third quarter and fourth quarter combined.

Now this allowed increase of $37m cost, that I talk about with respect to early call of our debt.

That is included in the $400m.

Moving on now to page 19 our return on capital employed, this slide really looks quite good with respect to the strength of our performance in the second quarter even though it could have been even better.

Guiding the return on capital employed you can see the impact higher prices had on our returns.

You can see the graph recurrently generating above average ROCE figures and we certainly were competitive with the largest companies in the industry.

Although we’ve made significant progress in closing he gap to cost reduction, asset sales and how we invest our money, we recognize that we still have more to do to close our capital employed gap when we use mid-cycle oil and gas prices

If you look at the second quarter what was paid up as 24% and (inaudible) second quarter ROCE number EFP is about 28.5% refining and marketing 29%, our joint ventures and technicals (ph) in mid stream about 16.6 % and we have a negative impact of other corporate and emerging business which brought the total for the total company to 24.5%

Now I am going to the last slide page 20, I mentioned earlier in the immediate release, we continue our plans to develop a global company, or focus on continuous improvement in every part of our business and the strong commodity price environment we certainly understand and we can point to it in the second quarter, the importance of safety, consistency and reliable operations is so important particularly in a strong price and downstream margin environment.

In the third quarter we expect to see further declines in production, when you compared the first quarter to the second quarter and as a result of seasonal impact in tax, weather and plan maintenance in Alaska North Sea.

We are taking some pretty major turn arounds as planned, for the Alpine fields, (Inaudible) Norway, along with Britania in the UK.

So our production on Barrel oil (inaudible) in the third quarter compared to the second quarter, then it ramps up in fourth quarter and we are staying right with our expected production for the year, which is $1.56m DOE a day for the full year 2004 and again this was exactly the target that we outlined at the beginning of 2004.

Expiration Express is on is on track it will be, for the year about 600m for 2004, but I want to point out that it excludes the impact that we have a pretty important and an expensive wells (inaudible) in (inaudible), we are drilling that well we have no indications of the success or non success at this point in time I’d just merely like to point that out.

Now with regard to down spring, we are in the second year of a four/five year program, it’s about 1.9-$2b program of implementing, cleaning the clean tools, requirements in the United States so that program continues.

We plan to maintain our capacity utilization refining in the mid 90% range in spite of the heavy turn around activity particularly that which is associated with the implementation and clean fuels investment program.

So I want to point out that not only are we certainly trying to run all of our refineries at maximum capacity but we do have our schedule turn around and we do have to take the longer time for turn around to implement our clean fuels investment .

Our Pre- tax turn around expense should be about $250m for the year the third quarter is obviously going to be less than the second quarter.

So that really completes the comments I wanted to make on those slides.

I think now we should open the teleconference call for whatever questions and observations people might have of us and hopefully myself or John Carrig will be able to answer your questions.

Tracy can you line up some questions for us?

Thank you the question and answer section will be conducted electronically.

If you would like to ask a question please press the star key followed by the digit one on your telephone.

Once again, just press star one if you would like to ask a question.

We will go first to Doug Harrison, with Morgan Stanley.

Hi Jim how are you?

Good, fine Doug

In Russia you guys have been said to be interested in additional investment in that country and on that topic, I wanted to see if we could get some elaborations on the strategy for Russia specifically are there certain types of commercial arrangements that ConocoPhillips would, or would not be interested in pursuing and if so can you relate the strategic and financial criteria that you think would need to be met?

If you think that that question is a little bit too sensitive given your circumstances, I will ask you another one and it has to do with Russia.

Specifically I just wanted to see if, since you have spent some time over there recently I think if you could spend a minute providing your assessment of the overall investment climate and specifically your view as to the government’s position towards outside investment in the petroleum sector at this time.

Well Doug, I think you have got two questions as I understand and they are both related to Russia.

As you know the company has been in Russia for a long period of time but in the rather modest way with respect to Polar Ice and we’ve certainly learned a great deal and – about how to do business in Russia.

It’s been great learning experience and technical success but financially it is a rather modest division.

Yeah

There is a lot of oil and gas reserves in Russia and over the last several years, in particular the last two years, we have been evaluating a number alternatives by which we can participate in making quite bit more substantial investment at Russia.

And we have been working with a number of different companies.

We are looking at asset type transactions, ventures and how we can do this.

As I said with a number of companies, our basic strategy is because of the amount of oil and gas reserves in Russia we would like to certainly be a major player there.

In terms of our metrics and what we are trying to achieve obviously we are looking for legacy assets that have become very meaningful in terms of income and cash flow over a sustained period of time using prices that are – not that we see today – but more the mid cycle prices.

We certainly want to make sure that whatever we can potentially do in Russia – gives us good access to reserve replacements, very competitive finding development costs as well as certainly help close the gap on where we want to be on our return on capital employed for expiration production as well as a total – company.

As you can see we are working with a number of companies there and we recently met with President Putin.

He is very supportive of what the company is working on and is trying to do in Russia.

This is oil and gas as well as L&G and other opportunities and based upon the support that we see and that has been given by President Putin, why we see the business environment climate quite conducive for long term energy investments for our company in Russia.

Okay that’s a good answer and congratulations on a great set of numbers.

Good Doug, thank you.

Of course as we went through in our slide presentation, we – there are areas and opportunities to do even better.

Sure, thanks

We will go next to Paul Ting, with UBS.

Good afternoon, two questions one is on the capital expenditure, looking at your first half capital expenditure on the upstream specifically, it is about 12% bigger then the first half of last year, slightly in the ballpark of about $2.5 billion, is there a good chance that you may exceed your budget at the upstream CapEx if I remember correctly of about $4.5 billion.

And second question, it is a numbers related question, about a down time related expense in the second quarter you identified the downstream but I wonder if you can give us a total impact of the downstream – of the downtime, upstream, downstream and chemicals if you have a number.

Well on the first one, in terms of how we are spending our money in the company, we continue just as we have balanced our capital spending will be in the neighborhood of $6 billion to 6.5 billion so we haven’t changed that and the spending is not changed in terms of the allocation between the upstream and the downstream part of the company.

In terms of the down the time I didn’t hear that quite well, so maybe John Carrig could help out with that one.

Well in terms of the total impact on the company, upstream and downstream and chemicals at the down time, I don’t really have a controllable of a cost figure for you, I think we are going to have to get back to you on that.

I just don’t have that handy.

If I ask a quick follow up on the up-stream again, your explosion expense of $300m and some for the first half, does that – which is about 20% higher a year ago, does that imply increased activity level in your explosion activity?

Now well, we are pretty much on time with the 42 Wildcats that we expected to drill this year and I think it at the analyst conference we said we expected to come in at about 600 for the year and we are right on track to do that as June indicated on the call earlier.

That does exclude potential impacts on (inaudible) but assuming that that was a dry hole, there could be a little bit higher but we are not prepared to make that assumption at this time.

OK Great, thanks a lot guys, appreciate it.

Now to Fred Refer with Bear Sterns

Good afternoon, I have three questions.

Jim you mentioned that there was a loss in US marketing, how large was that?

Well the loss in marketing relates, as I said, to our trading and petroleum products as well as it was margins in all, in the neighborhood of about $60m I think we made about $37m or $38m in international so (inaudible) in the total, we add about, I guess it works out to about $20m or $30m loss in total, globally in marketing.

what was the size of capitalized interest in the quarter?

The number?

Yeah.

Capitalized interest for the quarter was $104m which is about $11m less than it was in the first quarter.

And just sort of strategy question, concerning the mix of refining and marketing in the company, just wondering with kind of the robust market we have got right now for refining assets, if you are happy with the portfolio the way it is or if maybe you would take advantage of some of the real interest that is out there to buy refineries from the united sates.

Fred, one of the things that we are doing since the company is, we would like to see our portfolio be about 65% EMP, 30% in refining and marketing and then 5% in everything else, given you make a good point.

We certainly have a pretty sizeable program on the way, clean fuel’s technology is $2 billion over a multi year period of time.

We are also looking now, as a company what we can do and we are trying to take good payoff projects that even could potentially add little bit of capacity to refining and marketing, but we also want to be careful that we don’t put too much work and investment work on top of our operating units implementing clean fuel, but you make a good point, so we are working out how we can incrementally maybe in a smaller way, add some additional capital that has good payoff in refining and marketing, and that is not just in the US, it is also in international locations.

But I think as you look at the company, I think we will be around 65% exploration production, maybe a little bit more than 65% and then you would see refining and marketing be around 30% and maybe a little bit less than 30%, but then you take the joint ventures and mid stream in chemicals, I think as the company grows it wont be 5%, it would be closer to 3 or4%, so hopefully that’s a response to your question.

Okay thanks Jim.

We will move next to Argent Murphy with Goldman Sachs

Thanks Jim, just a follow up on Russia.

Can you talk, or at least hypothetically of whether one needs to have an equity investment in a company in order to gain access to the resource opportunities, is there any reason that there is sort of a preconditioned, does it make it easier to follow up discussions to have joint ventures from the actual opportunities you want to pursue or does one not necessarily need to have an equity investment to do that kind of stuff.

Argent you are kind of pushing me a bit here and I would much rather just say that as a response, we are working at all the alternatives by which we can participate in Russia and that could be joint ventures, that could be investments in assets, equity investments and so I think at this point in time it is just best for me not to comment.

That is fine, maybe just one follow up on a different subject, your debt levels are not at much healthier levels, obviously you are considering investments all over the world, can we presume that in the short term the plan is to continue either build up cash or pay down debt for the time being, rather than maybe be more aggressive with stock buy-back, with dividends or other things?

Okay, I think as I understand your question and what is the basic financial strategy of the company, as we get our debt down towards $15 billion, we will continue to work on some debt reduction but we don’t have to be aggressive as we have been in the past and some of it has actually come down some, but not as quickly or maybe as we have in the past so we will be aggressive we want to see a continuance increase each year in the annual dividend, we think that is important on dividends distributions, it is good discipline and it also gives us a more competitive payout and better support in terms of yield for the sale price.

So if the sale price goes up we think it is important to keep the dividend up to support the yield on the sale price.

Down to the extent that the pricing environment continues to be as strong as it has, we want to be looking at share repurchase, so as to get our shares outstanding on the (inaudible) basis back-half and hopefully get a sum of less than 700 million shares outstanding, so there is no change in basically the financial strategy of the company.

That’s right, thank you.

We will go now to Doug Lugget with Smith Barney.

Hi good afternoon guys, a couple of housekeeping questions and maybe one strategic if I may, I think I missed the mid-cycle with some (inaudible) number or maybe could (inaudible), could you tell us what that was in the quarter, because I think we have had that pretty much of the other quarter and if you could comment on the working capital and what was behind that and when you might expect that to reverse out and have a (inaudible) strategy

I found the mid-cycle ROCE (inaudible), we don’t provide that every quarter so we didn’t disclose it this quarter and we don’t plan to.

I think Craig what we will do though, is when we come forth in November at the analyst meeting we will show progress we made and where we stand in terms of ROCE for our business signs in the total company, compared to the competition, so that gets updated every year with the effective working capital in the second quarter we experienced primarily a build in inventory from the increase in receivables relative to payable due to the higher prices but also, built in inventory related to the seasonal aspect of our business.

I guess on the strategic questions really comes back to this mid-cycle issue, I think the number you are still using is $20 WTI and obviously there is perhaps a perception that number has been structurally higher and you have got a lot of opportunity ahead of you.

I wonder if you could just talk about where you see -- Is there any chance you might want to move your internal planning assumptions higher and specifically I guess could you comment on what capital commitments you may be anticipating in Libya.

Okay on the first I think you were talking about mid-cycle, functions and we continued to use our $20 WTI, 325 and MCF at every hub and 325 a barrel (inaudible) spread on the Gulf Coast and we have recognized that maybe those mid cycle numbers, should be somewhat higher in use by the financial community by higher assumption, but we want to continue to use those internally because we want to show an accountability wise and discipline in the company each of our business sides that we assuring continuous improvement on the same premises, we don’t want to declare some victory because we increase our normalized assumptions.

Now when we do our capital investing, we look at prices at $20 a barrel normalized and even available ore to make sure that we can live with our investments in the long term.

In terms of our assumptions for going forward, we use a price more in the – I’ll say in the mid $20 to take in our investments going forward at this point in time.

We do not use e $40 oil price, and I can also say that we haven’t passed on anything that we really need to do as a company in terms f our capital spending.

In terms of Libya, I think you asked a question on Libya, we certainly have an opportunity there going back into our old concessions, we are working and negotiating over that in the past several months with the authorities, I think this is going to continue to take more time, but we continue to be hopeful that we will be able to reenter and go back into Libya on the old concessions and hopefully there maybe some new business opportunities, but do it in a way that we are creating another legacy asset for the company and no way are we compromising, making investments against the investment metrics that we expect that we have to have.

So first, if things went well there for example, could we expect that you have got the head room then for the comfortable commitments that would be associated?

Yeah, yeah, yeah, we certainly have the ability to meet whatever capital requirements we have as we reenter and go into Libya.

Likewise I would like to say on the conference call as we talk about Libya, and we talk about Russia, Gutter [ph] is a very important country for us, it is – we are making most of our investments in the Middle East and that relates to (inaudible) protective chemicals that is in our joint venture with Chevron Texaco, but we are working very hard on the train that has been allocated to us in L&G, we are working on gas to liquid so, what we are really doing is our portfolio is making it not only in North America, as well as in the North Sea, but we are building great positions in Venezuela, Gutter [ph], hopefully in the Caspian and maybe up but certainly also in Russia.

A lot of what we have in places like China, and Malaysia, Indonesia, and the Timor Sea.

So we build all our plans working at this is.

This is one of the reasons that we have the ability to handle certainly Libya, but that’s one of the reasons why we have to continuously work on improving our financials divisions in the company so that we certainly have that capacity to go into all of these new ventures and to continue our spend and support of these long term ventures even if we have a weaker oil and pricing and off stream than we see today.

Okay that’s very helpful thank you very much.

Okay, we’ll get our next question from Mark Flannery with CS First Boston.

Hi Jim.

I’ve got a question here on the dividend.

Can I just clarify something?

You said earlier that you’re interested in increasing the competitive pay-out rate here, does that mean that over time you would like to see, let’s say your effective dividend yield or pay out approach those of your peer companies?

In other words are you signaling to us that you intend to close that gap?

I have a follow up question on that.

Well, I think I - - it might be misinterpreted and I don’t want to say that -- Here at um -- when we company our company in terms of the metrics and where we are, there are companies larger than ourselves for competitive reasons.

We have had more debt than the largest companies in the industry.

So, therefore we have allocated more of our resources towards debt reduction.

Now, in terms of the pay our of earnings and cash flow, we’re not as competitive for two reasons, one is we’ve been allocating more funds towards debt reduction but we also have very interesting long term investment opportunities for our size.

The pipeline of new investments opportunities that we see funding versus being more aggressive distributions in the form of share repurchase or dividends.

Now given that, what I’m really saying is maybe over time you’ll see those proportions go up but what we want to make sure is that as the share price goes up and the good fortunes we’ve had in the marketplace and we like to see the discipline of annual dividend increases and we want to see that our yields stays competitive with the other companies in the industry.

I would like bring to you that we have a plan to dramatically increase the pay out of earnings or the pay out of cash flow because we continue to work on debt reduction and our pipeline and investment opportunities.

Okay that’s very clear and my follow-up question is to do with small, let’s say incremental projects in the up-stream.

Are you seeing a series of those come onto your planning horizon or onto the radar screen now that oil is in the $35 to $40 area?

Are there a suite of projects that you might consider doing in the next 12 to 18 months quick payouts?

Let’s say 12 or 18 months ago you would not have considered doing ?

Well there’s something in particular in June, I think in prior conference calls we indicated that we do have a program in the Robo Trend and the conventional western Canada where if you look at refining and development costs, they’re quite a bit higher - - I would say in the high single digits, but on the other hand, we look at quick production and we look at the returns that we get at today’s market price environment, so, we have allocated quite bit of capital and make sure that we take advantage of those opportunities.

Particularly we call it infrastructural land investment – it’s not exploration it’s more – we have a very high success rate putting wells down there, higher cost but on the other hand we look at the price structure and it has great returns so we’ve allocated several hundred million dollars to support those parts of the business.

In terms of other things, I mean, we are working at everything, but most of our projects are allocated to the big mega-projects that we see that are going to have really lasting impact as legacy assets over a long period of time.

Great.

Thank you very much.

Gene Gillespie with Howard Wheel has our next question.

I’m sorry my questions have been answered, thank you.

We’ll move to Neil McMan with Stanford Bernstein.

I’ve got two questions for you.

I’ll ask the first one obviously first.

On Libya, it seems interesting that a lot of the commentary in the industry has been about when western companies that have been kicked out of Libya come back in.

All of a sudden it’s like they are going to find Aladdin’s cave and that the Libyans have been sitting back waiting for people to come in and get their riches.

It seems strange that that should be the case and they haven’t developed assets in the meantime as the sanctions were in place, from your discussion so far, do you think there is enough exploration upside there to make this a new legacy asset for you?

Well we certainly believe that the resources are there in Libya, and with the use of technology and working together in our old concessions with the Whaha (ph) group, we certainly feel that the technology, there’s opportunities to redevelop the field, get the production up and there are aspiration opportunities.

And then the other thing is that what helps the (inaudible) we see that there is going to be new acreage made available and that certainly can be of interest to our company, and then there may also be other opportunities in terms of development of long gas resources within Libya.

So we certainly, you know its tough negotiations, we have to - they certainly have to meet their objectives and so do we, but we have the expectation that we have the opportunity of making potential in Libya and other legacy assets in our portfolio.

I think the second question – thanks for that, the second question was really regarding refining capacity outside the US.

This has been a better discussion within the U.S., but what opportunities do you see either in Russia or the Middle East, Latin America for developing refining capacity plus the sole aim of importing products that meet US standards into the U.S.

Are you looking into that at the moment?

Well I’m not so sure its necessary for US standards.

One of the things that we see with the good fortune of development of our new company over the past – almost about now two years, is that we’ve been quite fortunate in being – how we’re accomplishing what we wanted to do on our balance sheet (inaudible) more quickly than we would have ever expected because of the pricing environment, and we see a lot of investment opportunities, so what is done is that we’re starting to look at what could we be in terms of developing part of our business and so when we look at refining and marketing, it’s not only in the United States, we look at Western Europe, Eastern Europe as well as Asia.

I don’t think there’s as much interest necessarily in Central or South America or the southern part of Africa, so we’re looking at - not so much necessarily what we could do to bring more products into the United States as we look at what could we do in refining and marketing, by North America, Western Europe, Eastern Europe and Asia, so yes we’re looking at these opportunities but as I said earlier, I think it would be weak to a modest increase in capitol allocation, spending each year in refining and marketing not any significant change in the strategy of allocating more of our funds to exploration production.

Great, thank you very much.

Our next question comes from George Gaspar with Robert W. Baird & Company.

Yes, good morning.

Jim, just kind of drill down a little bit on Alaska, can you give us a number on what your exploration expense would be and development expenses for this year.

I don’t that I have that immediately available, maybe George we could come back to you on that.

Okay, and I want to just pursue another question up there.

Based on other data that we have – that’s been coming in on some of these conference calls in both sides, EMP and service sector, there seems to be a problem in Alaska in getting any continuity at previous higher levels of drilling activity, and I’m just wondering if one of the problems associated with this is not being able to get everybody on board in the consortium to do the drilling on an exploratory or development basis.

Do you have any comment on this?

Well first, no, I – I - when it comes down to getting people together in terms of exploration, it is in some areas its rather mature and some areas its, you know, brand new exploration.

No, I don’t think there’s a problem and from our experience working with our partners, we all are being able to do it, I think the issue is how much money do we want to allocate towards exploration and what we think is the prospectivity of finding new large resource – of course you’ve got to find some pretty substantial resources up there because of the development cost and you’re looking primarily for oil because we don’t have the infrastructure in place for gas.

So I don’t think it’s a problem working with our partners at all, I think its an issue with respect to how much do we want to allocate prospectivity that we see for exploration in Alaska.

Okay

Your first question I don’t believe (inaudible) we have, I think capitol in Alaska in ’04 is around $650m, of which about 40 or 45 of that is exploration.

That’s good, now thanks for that data.

Second question Jim, is how do you size the possibilities of the natural gas pipelines looming in - I guess that’s the wrong term, “looming” – in North America, from Alaska and McKenzie Delta, which one do you think is going to go first?

Well there’s no question McKenzie Delta is going to go first.

It’s very close to being, you know, approved and commercialized and I think that’s started up with post production going through the McKenzie Delta, is like something like 2009.

Now if you look at Alaska - gas pipelines in Alaska, what we have for our company a lot reserves up here in the form of gas reserves from (inaudible) and hopefully other gas resources if there’s a pipeline.

Our country, United States definitely needs more supplies.

Now there’s a lot of work being done, including by our own company bringing LNG into the United States, from an Alaskan point of view, I think we’re working very hard with our partners, federal government, plus the state of Alaska, working hard to invest the gas pipeline in Alaska, because as I said the resources are there and I think people feel now is the time, of course we’re going to have – need help from the federal government, because of the things that we need, in terms of permitting and fiscal help as well as from the state of Alaska, certainly and fiscal help there.

But I think there’s a good recognition and a lot of LNG is going to come into our country, we need the gas and it’s important to advance the gas pipeline from Alaska so we don’t find that its delayed quite a bit behind all of the LNG resources coming into the country.

So we’re very proactive on this but again we’re going to need help from the federal authorities as well as the state authorities, I think everyone understands the importance of trying to commercialize gas from Alaska.

Okay, thank you for that explanation.

My third question and last, is on the petrochemical market, just an observation if you have.

It’s been reported that petrochemical output in the U.S. rose 12% during the second quarter, and which is a pretty heavy number, 43.5 billion pounds or excuse me 52.4 billion this year up from 43, and stocks of six basic petrochemicals record to be down 15%.

How do you see the second half in this market from your Co-op perspective?

Well at first what we could say is that whatever we do in chemicals is going to be tied very closely to the strength of the economy and the growth of the economy in the United States where we have most of our facilities.

Another thing is capacity utilization has been coming up.

We don’t see the visibility to export products from the US to other markets like we’ve had in past years and past decades because of out source from places like the Middle East tend to lower cost.

There have been quite a bit of capacity that has been shut down for economic reasons in the US.

So I think we’re cautious we said all along that we thought with the strength of the economy that the chemical business in the US would improve some what and the basic commodity chemicals that we went into the 2005 time period.

So I – we also in the second quarter this year we’ve had some pretty substantial down time scheduled turnarounds and I think some of our (inaudible) units.

So we’ll like to think that the financial results that we’ve seen so far in the second quarter will continue in the third and fourth quarter.

But looking for some real significant improvements beyond that I think we’ll have to see better market conditions and higher capacity utilization which may come in 2005.

But we’ll certainly update every one on this in November when we meet with the financial community.

Okay thank you very much.

We move on to J.J.

Trainer with Deutsche Bank.

Hello can I ask a couple of quick question please I think I’m right in saying that you did not take up any acreage in the Norwegian eighteenth round.

I wonder if you could confirm that and talk about your ongoing commitment to Norway.

And second there’s a very strange, well perhaps its strange story in the Polish press today linking you with an acquisition of TKN and I wonder if you have any comments on that?

Okay first with respect to Norway we’re always interested in what we can do to expand our position in Norway, you should not read anything into it that we did not have an interest in Norway because we didn’t participate in the last acreage round.

We did participate in terms of the study work and all but the acreage that we nominated that we would like to have interest in for different reasons and I think they are environmental reasons, some of the best acreage is still not yet made available to the industry, so we passed because we were looking for, had an interest in other acreage than that which was made available, so we continue to be real interested in Norway.

And with respect to the media as it relates to Polish TKN as I said we won’t comment on any specific rumor or article.

But one of the things I did say earlier we are as a company looking at what we would like to do and what could we be in terms of our refining market business in western Europe as well as eastern Europe.

Poland is an interesting country but it’s one that if we have to determine and review and work our potential and longer term objectives with respect to Eastern Europe.

Okay right, okay you’re leaving us with a little bit of uncertainty on these acquisitions but I guess that’s how – where we are.

Okay next question.

Our next question comes from Jeb Armstrong with Argus Research.

Great quarter gentlemen.

Thanks Jeb.

Most of my questions have been answered just a couple minor follow ups.

In the chemical segment you mentioned that there was a property settlement I was just curious what the amount was there?

It was about $6m.

$6m okay.

And then secondly in the ENT realization it said the equity affiliates realization for, on the natural gas side have declined from $3.91 cent in the first quarter 31 cents in the second quarter, am I reading that correctly?

It doesn’t sound right Jeb.

I can track that and come back to you on that one.

That doesn’t sound right.

Jeb there isn’t much in terms of gas realization from equity affiliates.

It’s on page 1 dash 5 is what I was looking at.

Okay let us track that down for you.

Thanks a lot.

Next we’ll hear from Paul Cheng with Lehman Brothers.

Hi gentlemen three quick questions.

Jim in – if I can go back to Russia from a portfolio management standpoint is there a level either from the capital and for your production mix production mix that you would feel comfortable to be focused or concentrated in Russia say 20% of your production, 15% what’s the maximum level?

The second question is under concession outlook for 2005 and capital spending, production I think that you have given us some guidance on that.

Is there any change to that?

And also so you have any (indiscernible) estimate outlook on the capital spending for 2005?

And then finally on your exploration program you are spending roughly about $800m per year on exploration and given you’re producing close to 600 million of all your equipment that year, and if we assume your exploration program is being designed to fully replace your production, that translates into a funding cost about $1.35 (indiscernible).

Is that a bit aggressive or is that – or was that in other words is it possible that we may be under spending on your exploration program here.

Thank you.

Okay let me start with the last question first in terms of exploration we certainly felt that at the time of the merger the combination of the exploration portfolio of the whole ConocoPhillips had opportunities to be rationalized, we have.

We will fund the exploration program in a way that’s commensurate with the opportunities that we see and prospectively of the acreage.

We look at exploration which is made up of pure wild cat new exploration as well as appraisal.

We spend quite a bit or our exploration money on appraisal specifically Frazer wells with respect to (inaudible) and Kazakhstan.

And we also do exploration and have a pretty high degree of success I’ve said several places like Obo and western conventional Canada.

Our basic approach is that we’re producing about 600 million BOE, barrels or equivalent a year as we want a good exploration program that we’re tasking our explorationists with fining cost like you said comes to $1.35 or may be even better.

So given that’s what we’ve been doing I don’t think you’re going to see a great deal of change necessarily as we go from 2004 , 2005.

Obviously when we have a significant find or discover we’ll up it whatever it takes with respect to appraisal.

In terms of our production for ’05, I think you can look at that and say we’re continuing certainly with what we said to you last fall and we’ll update that in November along with the capital spending, In terms of Russia you asked what level or what ever we will be comfortable with in terms of Russia as part of our portfolio I think what we could say is and it’s kind of be a different way respond and say whatever we do in Russia will be commensurate with what we feel as a portfolio we can live with and fits nicely with respect to all the regions in the world by which we invest in.

So I don’t think we’re going to see this being dramatically moved one way or another by what we have in mind even though it can be rather significant to what we have in mind in terms of what we would like to do in Russia.

We’d like to up our positions and our investments in Russia but I think what you -- assuming it all comes to past you will find that it represents a meaningful part but not more than what you expect a meaningful part of our portfolio.

Operator, I think we’ve got time for one more question please.

Thank you we’ll take that question from Jennifer Rowland with JP Morgan.

Thanks I just have two quick ones, first on the free part LNG project I was just wondering where that stands if you received all the necessary permits and if construction is still favored to begin here in the third quarter?

We received our first approval on June 18th and we’re progressing with the partners for the EPC contracts and I would characterize it as being on schedule.

Okay so are there any more permits that you still need to get?

Oh there are a variety of different permits that you need to get in a project of this size but I don’t believe that any of them are insurmountable.

Okay and the last question is can you give us a sense of what your worldwide capacity utilization rates may look like on the down stream in the second half of the year?

Like we said we’re targeting some thing I will say in the mid 90s or a little bit less in the mid 90s.

It really goes from quarter to quarter it’s tied in with what we have in our finance schedule for turnarounds.

And the third quarter we don’t have a lot for turn around probably more in the fourth quarter or so.

And then we also have to address some of our turnarounds quite a bit longer than we might have expected as we implement the technology that we need to meet those fuel requirements.

So I think what you can go forward is somewhere in the middle of you know mid 90s may be a bit less, maybe a bit more but probable maybe a little bit less as we go forward.

Okay thank you.

Great I think we’re out of time here.

We’d like to thank every body for their participation and interest in the call and certainly Mark and I are available if you got additional questions.

This conference call and transcript along with the slide will remain on our web site for the next several weeks and you can access that information at cononcophillips.com.

Thanks again for participating.

Thank you for participating in today’s conference.

Thank you every one for joining.